New Home Sales — Misleading Metrics — Downturn Not as Severe as Thought — Year-Over-Year Q1 Sales Almost Identical

New home sales for March 2014 were released earlier this week, down 13.3 percent from March 2013 and off 14.5 percent sequentially from February 2014. These numbers, however, are not indicative of what is really going on in new home sales or even new home construction. Sales are not really down at all in 2014. In the first three months of this year, new home sales are almost identical to the same period in 2013. The first quarter of 2013 saw 109,000 new homes sales compared to 107,000 in Q1 2014 – a reduction of just 2,000 or 1.8 percent. Given the monthly revisions of new home sales data, it would not surprise me to see this difference disappear.

From a year-over-year and sequential basis in March, while sales were down, prices were up – more than double digits percentage wise. Median price ($290,000) rose 12.6 percent year-over-year while the average price ($324,200) was up 11.3 percent.

New Home Sales are Different from Existing Home Sales

Unlike existing home sales, which are based on the number of actual closings where the ownership is transferred from one individual to another, new home sales are merely a tally of the number of signed contracts. A contract can be signed prior to the pouring of the foundation, with ownership not transferring from the builder to the ultimate owner, in some instances, for a year or more.

New homes sales are exclusively based on single family dwellings. As interest rates and home values have risen, some buyers have switched to condominiums as a more affordable single family alternative. Condo sales are not included in any of the new home sales volumes. Hence, total new home dwelling sales are greater than reported in these data.

Tighter lending standards have resulted in a shrinking first-time homebuyer market. Prior to the housing bubble, first time homebuyers made up 40 percent of existing home sales. March 2014 saw just 30 percent of existing home sales to first-time buyers. Between an average 750 FICO score for buyers today with conventional loans, the new stringent Qualified Mortgage rules (QM) limiting those who can qualify and often increasing the required down payment, and student loan debt, many have been relegated to being renters rather than buyers. That in turn has driven builders away from lower-dollar entry level housing for the first-time buyer, to larger, higher-end, more expensive homes for the move-up market.

Since the recession, very few new residential land developments have come online. In many markets there is an extreme lot shortage. As a result, higher land costs have relegated many builders to construct fewer, but higher-end dwellings. I believe it is not just the value of a typical home value going up reflected in rising new home prices, but also an increase in larger, higher-amenity new homes being sold.

The number of new home sales are shown in the following two graphs. The first is the seasonally adjusted annualized rate as reported by the U.S. Census Bureau. The second graph is the 12-month moving average of the same data. It removes the noise seen from-to-month in data and better illustrates trends.

The next graph shows the raw (not averaged) new home sales numbers on the left and the 12-month moving average of the same data on the right, monthly, since 2010.

New home median prices are shown in the following graph.

When compared to existing home prices, the premium paid for a new home today is comparably high. To remove the monthly noise from the data, the graph uses 12-month moving averages of median new and existing home sales.

Not surprisingly, the premium paid for the typical new home today is relatively large — $68,800 to be exact, when comparing the 12-month moving averages of new and existing median home prices. The average percentage premium for new homes compared to existing homes in 2002 (pre-bubble) was 13.7 percent, versus 36.1 percent in the latest 12 months.

All considered, am I worried about a “plunging housing market”? Not at all. Once you drill into the data, things are much better than the initial glance at a few statistics would indicate.

A just released report indicated that homebuilders, the PulteGroup and D.R. Horton, increased new home prices 10 percent in the first quarter of 2014—a move to bolster margins in a limited supply market.

As mentioned earlier, new home sales of 107,000 in the first 3 months of 2014 was within 1.8 percent of the number of sales in the same period in 2013 (109,000). Still 2014 is the second best since 2009, which had 84,000 sales and better than 2010 (87,000), 2011 (71,000) and 2012 (87,000).

This new home sales analysis contains the latest updated sales and prices – so throw out any previous series and analyses you have from Ted.